Risk.net reported on Wednesday market concern that adding a spread to a risk free rate to produce an LIBOR substitute could create basis risk unless the spread is variable. The spread between risk-free and bank-risk rates is not static, widening in bad times (when the credit market experiences a flight to quality) and narrowing when attitudes to risk are more relaxed. So a bank borrowing inter-bank will have to pay more in a stressful time, and at the same time assets based on an ersatz LIBOR based on a risk free rate would pay less – unless the spread used is dynamic. A “source close to the loan market” on the US’s Alternative Reference Rates Committee is quoted as saying “there are interested parties in keeping LIBOR going to avoid this scenario… However, we’ve argued you still need to prepare for the potential of a Libor cessation, even if the risk is just 1%”.